Deutsche Bank sold EUR2-3 billion (USD1.8-2.7 billion, notional) of two-month out-of-the-money U.S. dollar calls/euro puts on behalf of a customer in the London fx market last Wednesday, causing implied volatility to slip almost a full percentage point. "That is just a massive move," noted a trader in London. A currency derivatives trader at Deutsche Bank confirmed the transaction, declining all further comment.
The euro puts are struck at USD0.8650, according to traders at rival firms. Spot was USD0.888 Wednesday. The option seller wins if the euro remains above the strike. Normally a two-month OTC option entered on Dec. 4 would expire on Feb. 4, but Deutsche Bank tweaked the expiration date so the trade closes out on Feb. 1--a Friday. Rival fx options traders said this indicates the sale of euro puts is designed to clean up the firm's books. "If you were to initiate a short position you would be happy [to have it expire on the Monday], but they clearly chose the Friday before, which indicates an existing position," said one trader. He added: "I don't believe Deutsche just said 'today's a good day to sell, let's go and whack it,' because there hasn't been anything of this size in months."
The trade also appears to be a tax-related closing-out because it occurred shortly before the end of the year, when liquidity is poor and punters wouldn't otherwise choose to put through such large volumes, traders added. The option seller would be able to book premium earned in the trade as profit this year--perhaps to offset losses--irrespective of whether the position expires in the money next year.
Two-month implied vol fell to 10% Wednesday from 10.9% at the beginning of the week after the trades were executed, mostly in lots of EUR100 million, said one dealer. Traders noted that at least a dozen banks participated.
